Hi Lawrence,

Not right now.

Thanks,
Lawrence

Yes, that’s a typo and it’s been changed. Thanks the for the heads up.

It should be +$500 banked and -$400 floating loss.

#3: +$250
#4: +$150
Total: $500

How did you bank 400 in number 5 example? If in 4 you had 300$ profit and 550$ loss you closed 300$ profit and Closed 150$ which is half of 300$. Net is -400$.

Hey Keith,

Yes, good questions.

First of all, the best thing to do is open a demo account and try this out for yourself, if you haven’t already. It’s hard to conceptualize this without actually doing it.

Second, the 1:1 hedge and the 50% Roll-Off is just a starting point. Remember that you can hedge and Roll-Off 100%, 50%, or whatever you feel is appropriate. A lot of people try to trade this mechanically according to the start point example above, but that will never work.

You also have to understand price action or use some sort of trading strategy that gives you a frame of reference on when to buy and sell.

For example, if you are at a strong resistance level on the daily chart and you have a naked short position, it’s probably not a good idea to take a 100% hedge on the long side. It’s probably better to take a 25% hedge and wait to see what price will do at the resistance level. If it breaks to the long side and holds, then you might want to add another 75% to the hedge. If it bounces and heads down, then you won’t be stuck with a bunch of losing longs and it will be easier to offset that with your winning shorts.

1. Getting flat means having no positions on both the long and short sides.
2. The key here is to understand your net position on both sides, and your worst case scenario. So if your max size on each side is 1,000 nano lots, you should be willing to take as many trades as necessary within that limit and not think of it as having to always do a 100% hedge. Sometimes there’s an opportunity to take profit of 10 pips on a small position. Sometimes you want to hold a bigger position for a bit, until you see a good place to trade.

Finally, remember that if you can accrue a net position that pays positive interest, then holding a losing position isn’t necessarily a bad thing, as long as you are hedged at a good spot and are actively looking for ways to get flat. If your positive interest position goes into the money far enough, you can even consider removing the hedge and using a straight stop loss.

My position size on the short side is now 0.50 Lots. If my understanding is correct, I would also open a new hedge equal (for a 1:1) to the remaining short. At the 50-pip mark, I should have 0.50 Lots on the buy side and 0.50 Lots on the sell side. Now, this is where I’ve noticed things getting tricky… Let’s say price goes up another 50 pips (100-pip mark). Now my buy side is in profit by +$250.00 ($5.00 x 50 pips) and my sell side is down by -$500.00 ($5.00 x -100 pips). At this point, I close out 100% of my buy for a profit of +$250.00 and IDEALLY, I would close out -$125.00 of loss on my sell side order (since it is half of my +$250.00 profit). In this case, the -$125.00 is only 25% of the losing sell side order (the sell side order is now 0.50 Lots x -100 pips = -$500.00). As a result, my “float” on the sell side would now be -$375.00.

At this rate, it seems that my negative “float” will only continue to get larger. What I mean by this is that although the Lot size is decreasing on both sides, the amount of pips price is moving against sell/losing side is increasing and as such, “getting flat” seems impossible because the diminishing returns on the winning side cannot keep up…UNLESS you open unhedged orders or another hedge series to compensate for or balance out the negative float.

Buy/Winning Side: Sell/Losing Side: Profit: Float:
(1.000 Lots) x (+ 50 pips) = +$500.00 (1.000 Lots) x (- 50 pips) = -$500.00 ($250.00) (-$250.00)
(0.500 Lots) x (+ 50 pips) = +$250.00 (0.500 Lots) x (- 100 pips) = -$500.00 ($125.00) (-$375.00)
(0.375 Lots) x (+ 50 pips) = +$187.50 (0.375 Lots) x (- 150 pips) = -$562.50 ($ 93.75) (-$468.75)

As you can see, it doesn’t seem sustainable. However, I hope that my math and understanding is grossly incorrect because it seems as though the more Roll-Offs that you do, the larger your negative “float” becomes.

Question 1: When you mention getting flat, is that a reference to zeroing out your negative float or having no trade positions open for the hedge series?

Question 2: If the losing position is becoming progressively larger (in terms of dollars accrued by negative float) due to the number of pips being added with each Roll-Off, even if you closed out the 100% equivalent of loss from the losing side to match the profit made on the winning side, there will still be diminishing returns on the winning/buy side. If that is the case, how can one get flat without opening another hedge series or other un-hedged trades? Or would un-hedged trades be the answer to this problem?

Hey Marcelo,

It’s very difficult to get the concept by writing/reading about it. I would highly suggest using a demo account or backtesting software to give it a try, without risking real money.

Hedging requires you to carry a losing position, that’s just how it works. There are no free lunches in trading. You are exchanging the risk of taking a hard stop loss for the risk of carrying a net loss.

However, the amount of time that you carry that position will depend on how diligent you are in trimming your losing positions and how good you are with building net interest bearing positions.

Let’s break down your example:

1. Long 10K units of EURUSD
Short 10K units of EURUSD

2. Market moves 500 pips in favor of the long. Result:
Long 10K units @ +$500
Short 10K units @ -$500

3. Take profit on the long and Roll-Off part of short. Result:
Long 0 units @ $0
Short 5K units @ -$250
Banked profit: +$250

4. Hedge 100% again with a long and price goes 600 pips against you. Result:
Long 5K units @ +$300
Short 5K units @ -$550

5. Roll-Off long again. Result:
Long 0 units @ $0
Short 2.5K units @ -$400
Banked profit: +$500

So there are a few points that you might be missing:

1. You probably wouldn’t let the trade go 600 pips against you before starting to work down the short side. That’s a lot of pips in the EURUSD. You would probably start working off your loss much earlier.
2. You can always add new positions to either side to start working down the losing short position. The market will ebb and flow and you could even take new short positions and roll those profits off your losing short position.
3. You just reduced your short exposure from 10K units to 2.5K. That’s a 75% reduction, which is huge, and makes it much easier to get to flat within the next few trades.
4. You could also choose to take money from your banked profits to reduce your floating loss even more.

Remember that this isn’t a cut-and-dry method, so there aren’t specific rules. It’s way more art than science. Again, practice is the best way to figure out what works best for you.

Hope that helps.

Awesome article but I’m still trying to be my head around heading… Let me give you a quick example and see if you can help me to understand better your approach:

1st Open 2 positions (Long and Short)

2nd Long position is now USD 500 and short position – USD 500. Close your long position and reduce your short position by half. Net profit of USD 250 and floating loss of -USD 250.

3rd Open a long position to hedge your short position.

Let’s say now that the market is a Bull market, my long position would go +USD 300 but my short position -USD 300… Since I was already carrying a – USD 250 on my short now I have – USD 550 floating loss.

What I don’t understand is… if you keep going with that approach you might realize some profits but you will always have a floating loss.

Am I missing something hear?

Hi Sam,

I’ve never had issues getting legged in/out of trades in FX.

Do you find yourself getting legged much in FX?

OK, I did some research on this and it is possible to use my strategy with a non-US Oanda account. You are probably looking at the tab that gives the total position, that’s why your trades are all mashed together. Can you double check and let me know?

OANDA have their own world TBH, like the way they do swap and partial closing of trades :p For a non-hedge account, if you want to partial close, you issue another transaction. Say you have 1,000 units long, you sell 500 units. For a hedge account, this won’t work.